|
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
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For the quarterly period ended February 29, 2012
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from to
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Delaware
|
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36-2517428
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
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2500 Lake Cook Road,
Riverwoods, Illinois 60015
|
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(224) 405-0900
|
(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
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Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
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|
|
|
Part I.
|
FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
|
February 29,
2012 |
|
November 30,
2011 |
||||
|
(unaudited)
(dollars in thousands,
except share amounts)
|
||||||
Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
6,315,152
|
|
|
$
|
2,849,843
|
|
Restricted cash
|
361,307
|
|
|
1,285,820
|
|
||
Investment securities:
|
|
|
|
||||
Available-for-sale (amortized cost of $6,074,227 and $6,019,927 at February 29, 2012 and November 30, 2011, respectively)
|
6,174,073
|
|
|
6,107,831
|
|
||
Held-to-maturity (fair value of $95,935 and $96,042 at February 29, 2012 and November 30, 2011, respectively)
|
95,703
|
|
|
98,222
|
|
||
Total investment securities
|
6,269,776
|
|
|
6,206,053
|
|
||
Loan receivables:
|
|
|
|
||||
Loans held for sale
|
—
|
|
|
714,180
|
|
||
Loan portfolio:
|
|
|
|
||||
Credit card
|
45,917,598
|
|
|
46,638,625
|
|
||
Other
|
5,257,517
|
|
|
4,733,742
|
|
||
Purchased credit-impaired loans
|
5,124,146
|
|
|
5,250,388
|
|
||
Total loan portfolio
|
56,299,261
|
|
|
56,622,755
|
|
||
Total loan receivables
|
56,299,261
|
|
|
57,336,935
|
|
||
Allowance for loan losses
|
(1,978,591
|
)
|
|
(2,205,196
|
)
|
||
Net loan receivables
|
54,320,670
|
|
|
55,131,739
|
|
||
Premises and equipment, net
|
486,520
|
|
|
483,250
|
|
||
Goodwill
|
255,421
|
|
|
255,421
|
|
||
Intangible assets, net
|
186,232
|
|
|
188,018
|
|
||
Other assets
|
2,290,940
|
|
|
2,383,793
|
|
||
Total assets
|
$
|
70,486,018
|
|
|
$
|
68,783,937
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
||||
Deposits:
|
|
|
|
||||
Interest-bearing deposit accounts
|
$
|
40,014,625
|
|
|
$
|
39,463,887
|
|
Non-interest bearing deposit accounts
|
133,287
|
|
|
113,575
|
|
||
Total deposits
|
40,147,912
|
|
|
39,577,462
|
|
||
Short-term borrowings
|
—
|
|
|
50,000
|
|
||
Long-term borrowings
|
18,753,958
|
|
|
18,287,178
|
|
||
Accrued expenses and other liabilities
|
2,755,196
|
|
|
2,627,086
|
|
||
Total liabilities
|
61,657,066
|
|
|
60,541,726
|
|
||
Commitments, contingencies and guarantees (Notes 8, 11, and 12)
|
|
|
|
||||
Stockholders’ Equity:
|
|
|
|
||||
Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 551,538,212 and 549,748,783 shares issued at February 29, 2012 and November 30, 2011, respectively
|
5,515
|
|
|
5,497
|
|
||
Additional paid-in capital
|
3,528,480
|
|
|
3,507,754
|
|
||
Retained earnings
|
5,820,609
|
|
|
5,243,318
|
|
||
Accumulated other comprehensive loss
|
(48,604
|
)
|
|
(51,679
|
)
|
||
Treasury stock, at cost; 21,517,483 and 20,918,354 shares at February 29, 2012 and November 30, 2011, respectively
|
(477,048
|
)
|
|
(462,679
|
)
|
||
Total stockholders’ equity
|
8,828,952
|
|
|
8,242,211
|
|
||
Total liabilities and stockholders’ equity
|
$
|
70,486,018
|
|
|
$
|
68,783,937
|
|
|
February 29,
2012 |
|
November 30,
2011 |
||||
|
(unaudited)
(dollars in thousands)
|
||||||
Assets
|
|
|
|
||||
Restricted cash
|
$
|
360,306
|
|
|
$
|
1,274,175
|
|
Credit card loan receivables
|
32,820,047
|
|
|
33,815,860
|
|
||
Purchased credit-impaired loans
|
2,772,796
|
|
|
2,839,871
|
|
||
Allowance for loan losses allocated to securitized loan receivables
|
(1,323,867
|
)
|
|
(1,510,730
|
)
|
||
Other assets
|
30,745
|
|
|
33,724
|
|
||
Liabilities
|
|
|
|
||||
Long-term borrowings
|
$
|
16,741,441
|
|
|
$
|
15,842,512
|
|
Accrued interest payable
|
14,094
|
|
|
13,184
|
|
|
For the Three Months Ended
|
||||||
|
February 29, 2012
|
|
February 28, 2011
|
||||
|
(unaudited)
(dollars in thousands, except per share amounts)
|
||||||
Interest income:
|
|
|
|
||||
Credit card loans
|
$
|
1,423,806
|
|
|
$
|
1,417,116
|
|
Other loans
|
202,837
|
|
|
119,536
|
|
||
Investment securities
|
17,511
|
|
|
12,215
|
|
||
Other interest income
|
2,405
|
|
|
4,097
|
|
||
Total interest income
|
1,646,559
|
|
|
1,552,964
|
|
||
Interest expense:
|
|
|
|
||||
Deposits
|
228,773
|
|
|
256,695
|
|
||
Short-term borrowings
|
1
|
|
|
46
|
|
||
Long-term borrowings
|
124,486
|
|
|
125,987
|
|
||
Total interest expense
|
353,260
|
|
|
382,728
|
|
||
Net interest income
|
1,293,299
|
|
|
1,170,236
|
|
||
Provision for loan losses
|
151,529
|
|
|
417,709
|
|
||
Net interest income after provision for loan losses
|
1,141,770
|
|
|
752,527
|
|
||
Other income:
|
|
|
|
||||
Discount and interchange revenue, net
|
264,311
|
|
|
260,916
|
|
||
Protection products revenue
|
104,861
|
|
|
108,553
|
|
||
Loan fee income
|
84,451
|
|
|
85,600
|
|
||
Transaction processing revenue
|
52,481
|
|
|
42,551
|
|
||
Merchant fees
|
3,705
|
|
|
4,655
|
|
||
Gain on investments
|
—
|
|
|
141
|
|
||
Other income
|
39,694
|
|
|
60,208
|
|
||
Total other income
|
549,503
|
|
|
562,624
|
|
||
Other expense:
|
|
|
|
||||
Employee compensation and benefits
|
246,725
|
|
|
213,075
|
|
||
Marketing and business development
|
131,429
|
|
|
135,665
|
|
||
Information processing and communications
|
70,463
|
|
|
64,717
|
|
||
Professional fees
|
99,500
|
|
|
90,331
|
|
||
Premises and equipment
|
17,309
|
|
|
17,248
|
|
||
Other expense
|
111,601
|
|
|
74,112
|
|
||
Total other expense
|
677,027
|
|
|
595,148
|
|
||
Income before income tax expense
|
1,014,246
|
|
|
720,003
|
|
||
Income tax expense
|
383,240
|
|
|
255,111
|
|
||
Net income
|
$
|
631,006
|
|
|
$
|
464,892
|
|
Net income allocated to common stockholders
|
$
|
624,424
|
|
|
$
|
459,428
|
|
Basic earnings per share
|
$
|
1.18
|
|
|
$
|
0.84
|
|
Diluted earnings per share
|
$
|
1.18
|
|
|
$
|
0.84
|
|
Dividends paid per share
|
$
|
0.10
|
|
|
$
|
0.02
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Treasury
Stock
|
|
Total
Stockholders’
Equity
|
|||||||||||||||
|
|
Shares
|
|
Amount
|
|
|
|
|
|
||||||||||||||||||
|
(unaudited)
(dollars and shares in thousands)
|
||||||||||||||||||||||||||
Balance at November 30, 2010
|
|
547,128
|
|
|
$
|
5,471
|
|
|
$
|
3,435,318
|
|
|
$
|
3,126,488
|
|
|
$
|
(82,548
|
)
|
|
$
|
(27,883
|
)
|
|
$
|
6,456,846
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
464,892
|
|
|
—
|
|
|
—
|
|
|
464,892
|
|
||||||
Adjustments related to investment securities, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,247
|
)
|
|
—
|
|
|
|
|||||||
Adjustments related to cash flow hedges, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,826
|
)
|
|
—
|
|
|
|
|||||||
Adjustments related to pension and postretirement benefits, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
342
|
|
|
—
|
|
|
|
|
||||||
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,731
|
)
|
|
—
|
|
|
(23,731
|
)
|
||||||
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
441,161
|
|
||||||
Purchases of treasury stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,004
|
)
|
|
(5,004
|
)
|
||||||
Common stock issued under employee benefit plans
|
|
13
|
|
|
—
|
|
|
271
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
271
|
|
||||||
Common stock issued and stock-based compensation expense
|
|
845
|
|
|
9
|
|
|
16,924
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,933
|
|
||||||
Dividends paid—common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,042
|
)
|
|
—
|
|
|
—
|
|
|
(11,042
|
)
|
||||||
Balance at February 28, 2011
|
|
547,986
|
|
|
$
|
5,480
|
|
|
$
|
3,452,513
|
|
|
$
|
3,580,338
|
|
|
$
|
(106,279
|
)
|
|
$
|
(32,887
|
)
|
|
$
|
6,899,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Balance at November 30, 2011
|
|
549,749
|
|
|
$
|
5,497
|
|
|
$
|
3,507,754
|
|
|
$
|
5,243,318
|
|
|
$
|
(51,679
|
)
|
|
$
|
(462,679
|
)
|
|
$
|
8,242,211
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
631,006
|
|
|
—
|
|
|
—
|
|
|
631,006
|
|
||||||
Adjustments related to investment securities, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,449
|
|
|
—
|
|
|
|
|||||||
Adjustments related to cash flow hedges, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,484
|
)
|
|
—
|
|
|
|
|||||||
Adjustments related to pension and postretirement benefits, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,890
|
)
|
|
—
|
|
|
|
|
||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,075
|
|
|
—
|
|
|
3,075
|
|
||||||
Total comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
634,081
|
|
||||||
Purchases of treasury stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,369
|
)
|
|
(14,369
|
)
|
||||||
Common stock issued under employee benefit plans
|
|
15
|
|
|
—
|
|
|
429
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
429
|
|
||||||
Common stock issued and stock based compensation expense
|
|
1,774
|
|
|
18
|
|
|
20,297
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,315
|
|
||||||
Dividends paid—common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,715
|
)
|
|
—
|
|
|
—
|
|
|
(53,715
|
)
|
||||||
Balance at February 29, 2012
|
|
551,538
|
|
|
$
|
5,515
|
|
|
$
|
3,528,480
|
|
|
$
|
5,820,609
|
|
|
$
|
(48,604
|
)
|
|
$
|
(477,048
|
)
|
|
$
|
8,828,952
|
|
|
For the Three Months Ended
|
||||||
|
February 29, 2012
|
|
February 28, 2011
|
||||
|
(unaudited)
|
||||||
|
(dollars in thousands)
|
||||||
Cash flows from operating activities
|
|
|
|
||||
Net income
|
$
|
631,006
|
|
|
$
|
464,892
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
||||
Provision for loan losses
|
151,529
|
|
|
417,709
|
|
||
Deferred income taxes
|
86,996
|
|
|
112,511
|
|
||
Depreciation and amortization on premises and equipment
|
22,975
|
|
|
22,042
|
|
||
Amortization of deferred revenues
|
(52,981
|
)
|
|
(60,351
|
)
|
||
Other depreciation and amortization
|
(38,485
|
)
|
|
(21,036
|
)
|
||
Gain on investments
|
—
|
|
|
(141
|
)
|
||
Loss on equity method and other investments
|
2,423
|
|
|
—
|
|
||
(Gain) loss on premises and equipment
|
(494
|
)
|
|
123
|
|
||
Loss on sale of other assets
|
315
|
|
|
—
|
|
||
Loss on loans sold and held for sale
|
518
|
|
|
—
|
|
||
Stock-based compensation expense
|
13,532
|
|
|
11,875
|
|
||
Gain on purchase of business
|
—
|
|
|
(15,917
|
)
|
||
Changes in assets and liabilities:
|
|
|
|
||||
Decrease (increase) in other assets
|
5,450
|
|
|
(43,733
|
)
|
||
Increase in accrued expenses and other liabilities
|
187,888
|
|
|
369,669
|
|
||
Net cash provided by operating activities
|
1,010,672
|
|
|
1,257,643
|
|
||
Cash flows from investing activities
|
|
|
|
||||
Maturities and sales of available-for-sale investment securities
|
491,226
|
|
|
332,954
|
|
||
Purchases of available-for-sale investment securities
|
(554,926
|
)
|
|
(542,025
|
)
|
||
Maturities of held-to-maturity investment securities
|
2,956
|
|
|
9,072
|
|
||
Purchases of held-to-maturity investment securities
|
(50,736
|
)
|
|
—
|
|
||
Proceeds from sale of loans held for sale
|
270,020
|
|
|
—
|
|
||
Net principal disbursed on loans originated for investment
|
305,591
|
|
|
14,255
|
|
||
Purchase of loan receivables
|
(223,669
|
)
|
|
(395,658
|
)
|
||
Purchase of business, net of cash acquired
|
—
|
|
|
(366,049
|
)
|
||
Purchase of other investments
|
(8,803
|
)
|
|
—
|
|
||
Decrease in restricted cash
|
924,513
|
|
|
884,950
|
|
||
Proceeds from sale of premises and equipment
|
515
|
|
|
13
|
|
||
Purchases of premises and equipment
|
(26,371
|
)
|
|
(15,586
|
)
|
||
Net cash used for investing activities
|
1,130,316
|
|
|
(78,074
|
)
|
||
Cash flows from financing activities
|
|
|
|
||||
Net (decrease) increase in short-term borrowings
|
(50,000
|
)
|
|
100,000
|
|
||
Proceeds from issuance of securitized debt
|
999,773
|
|
|
500,000
|
|
||
Maturities and repayment of securitized debt
|
(109,868
|
)
|
|
(1,819,185
|
)
|
||
Repayment of long-term borrowings and bank notes
|
(12,681
|
)
|
|
(315,028
|
)
|
||
Proceeds from issuance of common stock
|
2,431
|
|
|
931
|
|
||
Purchases of treasury stock
|
(14,296
|
)
|
|
(5,004
|
)
|
||
Net increase in deposits
|
562,475
|
|
|
442,435
|
|
||
Dividends paid on common stock
|
(53,513
|
)
|
|
(11,026
|
)
|
||
Net cash provided by (used for) financing activities
|
1,324,321
|
|
|
(1,106,877
|
)
|
||
Net decrease in cash and cash equivalents
|
3,465,309
|
|
|
72,692
|
|
||
Cash and cash equivalents, at beginning of period
|
2,849,843
|
|
|
5,098,733
|
|
||
Cash and cash equivalents, at end of period
|
$
|
6,315,152
|
|
|
$
|
5,171,425
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
||||
Interest expense
|
$
|
290,563
|
|
|
$
|
383,757
|
|
Income taxes, net of income tax refunds
|
$
|
45,993
|
|
|
$
|
38,209
|
|
Non-cash transactions:
|
|
|
|
||||
Assumption of debt by buyer related to loans sold
|
$
|
424,933
|
|
|
$
|
—
|
|
Post-closing adjustment payable - SLC acquisition
|
$
|
—
|
|
|
$
|
35,108
|
|
Assumption of SLC debt
|
$
|
—
|
|
|
$
|
2,921,372
|
|
1.
|
Background and Basis of Presentation
|
2.
|
Business Combinations
|
3.
|
Investments
|
(1)
|
Amount represents corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).
|
(2)
|
Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
(3)
|
Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period.
|
(4)
|
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's Community Reinvestment Act initiatives.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
(3)
|
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's Community Reinvestment Act initiatives.
|
4.
|
Loan Receivables
|
|
February 29,
2012 |
|
November 30,
2011 |
||||
Loans held for sale
(1)
|
$
|
—
|
|
|
$
|
714,180
|
|
Loan portfolio:
|
|
|
|
||||
Credit card loans:
|
|
|
|
||||
Discover card
(2)
|
45,708,205
|
|
|
46,419,544
|
|
||
Discover business card
|
209,393
|
|
|
219,081
|
|
||
Total credit card loans
|
45,917,598
|
|
|
46,638,625
|
|
||
Other loans:
|
|
|
|
||||
Personal loans
|
2,783,506
|
|
|
2,648,051
|
|
||
Private student loans
|
2,446,972
|
|
|
2,069,001
|
|
||
Other
|
27,039
|
|
|
16,690
|
|
||
Total other loans
|
5,257,517
|
|
|
4,733,742
|
|
||
PCI student loans
(3)
|
5,124,146
|
|
|
5,250,388
|
|
||
Total loan portfolio
|
56,299,261
|
|
|
56,622,755
|
|
||
Total loan receivables
|
56,299,261
|
|
|
57,336,935
|
|
||
Allowance for loan losses
|
(1,978,591
|
)
|
|
(2,205,196
|
)
|
||
Net loan receivables
|
$
|
54,320,670
|
|
|
$
|
55,131,739
|
|
(1)
|
Amount represents federal student loans. At
November 30, 2011
,
$446.6 million
of federal student loan receivables were pledged as collateral against a long-term borrowing. During first quarter 2012, Discover Bank sold these loans and recorded a loss of
$518 thousand
. As a part of this transaction, the related borrowings were assumed by the purchaser.
|
(2)
|
Amounts include
$19.2 billion
and
$18.5 billion
of underlying investors’ interest in trust debt at
February 29, 2012
and
November 30, 2011
, respectively, and
$13.6 billion
and
$15.4 billion
in seller’s interest at
February 29, 2012
and
November 30, 2011
, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for further information.
|
(3)
|
Amounts include
$2.8 billion
of loans pledged as collateral against the notes issued from the SLC securitization trusts at both
February 29, 2012
and
November 30, 2011
. See Note 5: Credit Card and Student Loan Securitization Activities. Of the remaining
$2.3 billion
and
$2.5 billion
at
February 29, 2012
and
November 30, 2011
, respectively, that were not pledged as collateral, approximately
$11.9 million
and
$12.8 million
represent loans eligible for reimbursement through an indemnification claim. Discover Bank must purchase such loans from the trust before a claim may be filed.
|
Delinquent and Non-Accruing Loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
|
30-89 Days
Delinquent
|
|
90 or
More Days
Delinquent
|
|
Total Past
Due
|
|
90 or
More Days
Delinquent
and
Accruing
|
|
Total
Non-accruing
(2)
|
||||||||||
At February 29, 2012
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Discover card
(1)
|
$
|
476,276
|
|
|
$
|
536,825
|
|
|
$
|
1,013,101
|
|
|
$
|
481,362
|
|
|
$
|
184,366
|
|
Discover business card
|
2,519
|
|
|
3,339
|
|
|
5,858
|
|
|
3,131
|
|
|
828
|
|
|||||
Total credit card loans
|
478,795
|
|
|
540,164
|
|
|
1,018,959
|
|
|
484,493
|
|
|
185,194
|
|
|||||
Other loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
|
14,116
|
|
|
8,484
|
|
|
22,600
|
|
|
7,713
|
|
|
3,076
|
|
|||||
Private student loans (excluding PCI)
|
19,433
|
|
|
3,223
|
|
|
22,656
|
|
|
2,864
|
|
|
409
|
|
|||||
Other
|
196
|
|
|
1,566
|
|
|
1,762
|
|
|
—
|
|
|
1,779
|
|
|||||
Total other loans (excluding PCI)
|
33,745
|
|
|
13,273
|
|
|
47,018
|
|
|
10,577
|
|
|
5,264
|
|
|||||
Total loan receivables (excluding PCI)
|
$
|
512,540
|
|
|
$
|
553,437
|
|
|
$
|
1,065,977
|
|
|
$
|
495,070
|
|
|
$
|
190,458
|
|
At November 30, 2011
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Discover card
(1)
|
$
|
554,354
|
|
|
$
|
556,126
|
|
|
$
|
1,110,480
|
|
|
$
|
498,305
|
|
|
$
|
200,208
|
|
Discover business card
|
2,823
|
|
|
3,548
|
|
|
6,371
|
|
|
3,335
|
|
|
860
|
|
|||||
Total credit card loans
|
557,177
|
|
|
559,674
|
|
|
1,116,851
|
|
|
501,640
|
|
|
201,068
|
|
|||||
Other loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
|
15,604
|
|
|
7,362
|
|
|
22,966
|
|
|
6,636
|
|
|
3,628
|
|
|||||
Private student loans (excluding PCI)
|
10,073
|
|
|
2,992
|
|
|
13,065
|
|
|
2,883
|
|
|
125
|
|
|||||
Other
(3)
|
507
|
|
|
2,091
|
|
|
2,598
|
|
|
—
|
|
|
2,317
|
|
|||||
Total other loans (excluding PCI)
|
26,184
|
|
|
12,445
|
|
|
38,629
|
|
|
9,519
|
|
|
6,070
|
|
|||||
Total loan receivables (excluding PCI)
(3)
|
$
|
583,361
|
|
|
$
|
572,119
|
|
|
$
|
1,155,480
|
|
|
$
|
511,159
|
|
|
$
|
207,138
|
|
(1)
|
Consumer credit card loans that are 90 or more days delinquent and accruing interest include
$36.4 million
and
$37.9 million
of loans accounted for as troubled debt restructurings at
February 29, 2012
and
November 30, 2011
, respectively.
|
(2)
|
The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of these credit card loans was
$8.3 million
for the
three
months ended
February 29, 2012
. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. These amounts were estimated based on customers' current balances and most recent rates.
|
(3)
|
At November 30, 2011, amounts also exclude federal student loans that were held for sale.
|
Net Charge-Offs:
|
For the Three Months Ended
|
|
For the Three Months Ended
|
||||||||||
|
February 29, 2012
|
|
February 28, 2011
|
||||||||||
|
Net
Charge-offs
|
|
Net Charge-off
Rate
|
|
Net
Charge-offs
|
|
Net Charge-off
Rate
|
||||||
|
|
|
|
|
|
|
|
||||||
Credit card loans:
|
|
|
|
|
|
|
|
||||||
Discover card
|
$
|
355,367
|
|
|
3.06
|
%
|
|
$
|
661,243
|
|
|
5.93
|
%
|
Discover business card
|
2,336
|
|
|
4.36
|
%
|
|
6,533
|
|
|
10.38
|
%
|
||
Total credit card loans
|
357,703
|
|
|
3.07
|
%
|
|
667,776
|
|
|
5.96
|
%
|
||
Other loans:
|
|
|
|
|
|
|
|
||||||
Personal loans
|
17,590
|
|
|
2.59
|
%
|
|
19,634
|
|
|
4.10
|
%
|
||
Private student loans (excluding PCI)
|
2,789
|
|
|
0.49
|
%
|
|
924
|
|
|
0.29
|
%
|
||
Other
|
52
|
|
|
1.06
|
%
|
|
34
|
|
|
0.97
|
%
|
||
Total other loans (excluding PCI)
|
20,431
|
|
|
1.49
|
%
|
|
20,592
|
|
|
2.07
|
%
|
||
Net charge-offs as a percentage of total loans (excluding PCI)
|
$
|
378,134
|
|
|
2.90
|
%
|
|
$
|
688,368
|
|
|
5.64
|
%
|
Net charge-offs as a percentage of total loans (including PCI)
|
$
|
378,134
|
|
|
2.64
|
%
|
|
$
|
688,368
|
|
|
5.42
|
%
|
|
February 29, 2012
|
|
November 30, 2011
|
||||||||
|
660 and Above
|
|
Less than 660
or No Score
|
|
660 and Above
|
|
Less than 660
or No Score
|
||||
Discover card
|
81
|
%
|
|
19
|
%
|
|
81
|
%
|
|
19
|
%
|
Discover business card
|
90
|
%
|
|
10
|
%
|
|
89
|
%
|
|
11
|
%
|
Personal loans
|
97
|
%
|
|
3
|
%
|
|
97
|
%
|
|
3
|
%
|
Private student loans (excluding PCI)
(1)
|
94
|
%
|
|
6
|
%
|
|
95
|
%
|
|
5
|
%
|
(1)
|
PCI loans are discussed under the heading "Purchased Credit-Impaired Loans."
|
|
For the Three Months Ended
|
||||||
|
February 29, 2012
|
|
February 28, 2011
|
||||
Balance at beginning of period
|
$
|
2,205,196
|
|
|
$
|
3,304,118
|
|
Additions:
|
|
|
|
||||
Provision for loan losses
|
151,529
|
|
|
417,709
|
|
||
Deductions:
|
|
|
|
||||
Charge-offs:
|
|
|
|
||||
Discover card
|
(497,105
|
)
|
|
(792,632
|
)
|
||
Discover business card
|
(3,110
|
)
|
|
(7,386
|
)
|
||
Total credit card loans
|
(500,215
|
)
|
|
(800,018
|
)
|
||
Personal loans
|
(18,228
|
)
|
|
(20,050
|
)
|
||
Federal student loans
|
—
|
|
|
—
|
|
||
Private student loans
|
(2,867
|
)
|
|
(939
|
)
|
||
Other
|
(52
|
)
|
|
(35
|
)
|
||
Total other loans
|
(21,147
|
)
|
|
(21,024
|
)
|
||
Total charge-offs
|
(521,362
|
)
|
|
(821,042
|
)
|
||
Recoveries:
|
|
|
|
||||
Discover card
|
141,738
|
|
|
131,389
|
|
||
Discover business card
|
774
|
|
|
853
|
|
||
Total credit card loans
|
142,512
|
|
|
132,242
|
|
||
Personal loans
|
638
|
|
|
416
|
|
||
Private student loans
|
78
|
|
|
15
|
|
||
Other
|
—
|
|
|
1
|
|
||
Total other loans
|
716
|
|
|
432
|
|
||
Total recoveries
|
143,228
|
|
|
132,674
|
|
||
Net charge-offs
|
(378,134
|
)
|
|
(688,368
|
)
|
||
Balance at end of period
|
$
|
1,978,591
|
|
|
$
|
3,033,459
|
|
|
Credit Card
|
|
Personal
Loans
|
|
Student
Loans
|
|
Other
Loans
|
|
Total
|
||||||||||
At February 29, 2012
|
|
|
|
|
|
|
|
|
|
||||||||||
Allowance for loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
1,630,436
|
|
|
$
|
88,394
|
|
|
$
|
54,347
|
|
|
$
|
215
|
|
|
$
|
1,773,392
|
|
Troubled debt restructurings
(2)
|
204,774
|
|
|
256
|
|
|
169
|
|
|
—
|
|
|
205,199
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total allowance for loan losses
|
$
|
1,835,210
|
|
|
$
|
88,650
|
|
|
$
|
54,516
|
|
|
$
|
215
|
|
|
$
|
1,978,591
|
|
Recorded investment in loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
44,720,511
|
|
|
$
|
2,775,406
|
|
|
$
|
2,439,442
|
|
|
$
|
27,039
|
|
|
$
|
49,962,398
|
|
Troubled debt restructurings
(2)
|
1,197,087
|
|
|
8,100
|
|
|
7,530
|
|
|
—
|
|
|
1,212,717
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
5,124,146
|
|
|
—
|
|
|
5,124,146
|
|
|||||
Total recorded investment
|
$
|
45,917,598
|
|
|
$
|
2,783,506
|
|
|
$
|
7,571,118
|
|
|
$
|
27,039
|
|
|
$
|
56,299,261
|
|
At November 30, 2011
|
|
|
|
|
|
|
|
|
|
||||||||||
Allowance for loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
1,865,797
|
|
|
$
|
81,838
|
|
|
$
|
52,601
|
|
|
$
|
220
|
|
|
$
|
2,000,456
|
|
Troubled debt restructurings
(2)
|
204,364
|
|
|
237
|
|
|
139
|
|
|
—
|
|
|
204,740
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total allowance for loan losses
|
$
|
2,070,161
|
|
|
$
|
82,075
|
|
|
$
|
52,740
|
|
|
$
|
220
|
|
|
$
|
2,205,196
|
|
Recorded investment in loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
45,421,887
|
|
|
$
|
2,640,416
|
|
|
$
|
2,063,562
|
|
|
$
|
16,690
|
|
|
$
|
50,142,555
|
|
Troubled debt restructurings
(2)
|
1,216,738
|
|
|
7,635
|
|
|
5,439
|
|
|
—
|
|
|
1,229,812
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
5,250,388
|
|
|
—
|
|
|
5,250,388
|
|
|||||
Total recorded investment
|
$
|
46,638,625
|
|
|
$
|
2,648,051
|
|
|
$
|
7,319,389
|
|
|
$
|
16,690
|
|
|
$
|
56,622,755
|
|
(1)
|
Represents loans evaluated for impairment in accordance with ASC 450-20,
Loss Contingencies.
|
(2)
|
Represents loans evaluated for impairment in accordance with ASC 310-10,
Receivables,
which consists of modified loans accounted for as troubled debt restructurings. The unpaid principal balance of credit card loans was
$1.0 billion
at both
February 29, 2012
and
November 30, 2011
, The unpaid principal balance of personal loans was
$8.0 million
and
$7.5 million
at
February 29, 2012
and
November 30, 2011
, respectively. The unpaid principal balance of student loans was
$7.1 million
and
$5.4 million
at
February 29, 2012
and
November 30, 2011
, respectively. All loans accounted for as troubled debt restructurings have a related allowance for loan losses.
|
(3)
|
Represents loans evaluated for impairment in accordance with ASC 310-30,
Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.
|
(1)
|
The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.
|
(2)
|
The Company does not separately track the amount of gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired credit card loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.
|
(3)
|
This balance is considered impaired, but is excluded from the internal and external program amounts below. Represents credit card loans that were modified in troubled debt restructurings but that have subsequently reverted back to loans' pre-modification payment terms either due to noncompliance with the terms of the modification or successful completion of a temporary modification program.
|
(4)
|
As interest rates for personal loan customers in modification programs and student loan customers that have been granted forbearance periods are rarely modified, gross interest income that would have been recorded with original terms is not significant.
|
(1)
|
The outstanding balance upon default is the loan balance at the end of the month prior to default.
|
(2)
|
A customer defaults from a modification program after two consecutive missed payments.
|
(3)
|
Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked.
|
(1)
|
Amount represents principal and interest payments, both currently due and due in the future, adjusted for the effect of estimated prepayments.
|
(2)
|
Charge-offs on acquired loans will be written off against non-accretable difference.
|
(3)
|
Amount accreted into interest income over the estimated lives of the acquired loans.
|
(1)
|
Amount represents principal and interest payments, both currently due and due in the future, adjusted for the effect of estimated prepayments.
|
(2)
|
Charge-offs on acquired loans will be written off against non-accretable difference.
|
(3)
|
Amount to be accreted into interest income over the estimated lives of the acquired loans.
|
5.
|
Credit Card and Student Loan Securitization Activities
|
(1)
|
The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company’s balance sheet in accordance with GAAP.
|
(1)
|
Investors’ interests include third-party interests and subordinated interests held by wholly-owned subsidiaries of Discover Bank.
|
|
3-Month Rolling
Average Excess
Spread
(1)(2)
|
|
Group excess spread percentage
|
14.07
|
%
|
DiscoverSeries excess spread percentage
|
13.94
|
%
|
(1)
|
DCMT certificates refer to the higher of the Group excess spread or their applicable series excess spread (not shown) and DiscoverSeries notes refer to the higher of the Group or DiscoverSeries excess spread in assessing whether an economic early amortization has been triggered.
|
(2)
|
Discount Series (Series 2009-SD) made principal collections available for reallocation to other series to cover shortfalls in interest and servicing fees and to reimburse charge-offs. These collections and their contribution to excess spread terminated when the Series 2009-SD certificates matured on January 17, 2012. Three-month rolling average excess spread rates shown reflect the availability of these additional collections in one of the three-months averaged.
|
6.
|
Deposits
|
(1)
|
$100,000
represents the basic insurance amount previously covered by the FDIC. Effective July 21, 2010, the basic insurance per depositor was permanently increased to
$250,000
.
|
7.
|
Borrowings
|
(1)
|
London Interbank Offered Rate (“LIBOR”).
|
(2)
|
Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The dates shown represent final maturity dates.
|
(3)
|
The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in LIBOR. See Note 14: Derivatives and Hedging Activities.
|
(4)
|
Under a program established by the U.S. Department of Education, this loan facility was entered into to fund certain federal student loans, which were held for sale at
November 30, 2011
. However, upon sale of the loans during the three months ended
February 29, 2012
, this loan facility was assumed by the buyer.
|
Year
|
Amount
|
||
Due in 2012
|
$
|
3,326,336
|
|
Due in 2013
|
5,179,066
|
|
|
Due in 2014
|
2,789,685
|
|
|
Due in 2015
|
1,597,460
|
|
|
Due in 2016
|
399,997
|
|
|
Thereafter
|
5,461,414
|
|
|
Total
|
$
|
18,753,958
|
|
8.
|
Income Taxes
|
9.
|
Earnings Per Share
|
The following securities were considered anti-dilutive and therefore were excluded from the denominator in the computation of diluted EPS (shares in thousands):
|
|||||
|
For the Three Months Ended
|
||||
|
February 29, 2012
|
|
February 28, 2011
|
||
Unexercised stock options
|
336
|
|
|
554
|
|
10.
|
Capital Adequacy
|
11.
|
Commitments, Contingencies and Guarantees
|
•
|
Merchant Guarantee
. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
|
•
|
ATM Guarantee.
PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
|
(1)
|
Represents period transactions processed on the Discover Network to which a potential liability exists which, in aggregate, can differ from credit card sales volume.
|
12.
|
Litigation and Regulatory Matters
|
13.
|
Fair Value Disclosures
|
(1)
|
There were
no
transfers between Levels 1 and 2 within the fair value hierarchy for the
three
months ended
February 29, 2012
and
February 28, 2011
.
|
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)
|
||||||||||||||||||||||||
For the Three Months Ended February 28, 2011
|
|
Balance at November 30, 2010
|
|
Total Realized
and Unrealized
Gains (Losses)
|
|
Sales
|
|
Net Transfers
Into and/
or Out
of Level 3
|
|
Balance at February 28, 2011
|
|
Change in unrealized gains (losses) related to financial instruments
held at
February 28, 2011
|
||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Equity securities
|
|
$
|
17
|
|
|
$
|
144
|
|
|
$
|
(161
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale investment securities
|
|
$
|
17
|
|
|
$
|
144
|
|
|
$
|
(161
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
14.
|
Derivatives and Hedging Activities
|
(1)
|
The foreign exchange forward contracts have notional amounts of EUR
14 million
and GBP
1.7 million
as of
February 29, 2012
and
November 30, 2011
.
|
15.
|
Segment Disclosures
|
•
|
Direct Banking.
The Direct Banking segment includes Discover card-branded credit cards issued to individuals and small businesses and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through the Company’s Discover Bank subsidiary. The majority of the Direct Banking revenues relate to interest income earned on each of its loan products. Additionally, the Company’s credit card products generate substantially all of the Company’s revenues related to discount and interchange, protection products (previously referred to as "fee products") and loan fee income.
|
•
|
Payment Services.
The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company’s third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties. The majority of the Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue (included in other income) from Diners Club.
|
•
|
Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct Banking segment.
|
•
|
Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments.
|
•
|
The assets of the Company are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.
|
•
|
The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.
|
•
|
Income taxes are not specifically allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.
|
16.
|
Subsequent Events
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
Net income for the first quarter 2012 was $631 million as compared to $465 million in the first quarter 2011.
|
•
|
Discover card sales volume was $25.6 billion in the first quarter 2012, an increase of 7% over the first quarter 2011. This growth was primarily due to an increase in the number of customers using their Discover card.
|
•
|
Our total loan portfolio grew to $56.3 billion, up $5.4 billion, or 11%, in the first quarter 2012 as compared to the first quarter 2011. This year-over-year growth is primarily due to an increase of $3.0 billion in PCI and private student loans, including the acquisition of $2.4 billion in PCI private student loans in the fourth quarter 2011. In addition, $1.6 billion is attributed to an increase in credit card loans, resulting from higher volumes and lower charge-offs.
|
•
|
Payments services had pre-tax income of $52 million, an increase of $9 million, or 21%, over the same quarter in 2011. Transaction volume for the segment was $47 billion in the quarter, an increase of 8% from the first quarter 2011.
|
•
|
We issued $1.0 billion of credit card asset-backed securities in a registered public offering on February 1, 2012 at a fixed interest rate of 0.81% and with a maturity of three years.
|
•
|
On March 13, 2012, we received non-objection from the Federal Reserve with respect to our proposed capital actions through March 31, 2013.
|
•
|
Also on March 13, 2012, our board of directors approved a dividend of $.10 per share of common stock and a new two-year share repurchase program authorizing the repurchase of up to $2 billion of our outstanding shares of common stock. For more information, see "- Liquidity and Capital Resources - Capital."
|
•
|
On March 23, 2012, we executed a share repurchase agreement with an unaffiliated financial institution under which we will purchase $250 million of our outstanding shares of common stock. For more information, see "- Liquidity and Capital Resources - Capital."
|
(1)
|
Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.
|
(2)
|
Represents gross proprietary sales volume on the Discover Network.
|
(3)
|
Represents Discover card activity related to net sales, balance transfers, cash advances, and other activity.
|
(4)
|
Represents Discover card activity related to net sales.
|
The following table outlines changes in our condensed consolidated statements of income for the periods presented (dollars in thousands):
|
||||||||||||||
|
For the Three Months Ended
|
|
2012 vs. 2011
increase (decrease) |
|||||||||||
|
February 29, 2012
|
|
February 28, 2011
|
|
$
|
|
%
|
|||||||
Interest income
|
$
|
1,646,559
|
|
|
$
|
1,552,964
|
|
|
$
|
93,595
|
|
|
6
|
%
|
Interest expense
|
353,260
|
|
|
382,728
|
|
|
(29,468
|
)
|
|
(8
|
)%
|
|||
Net interest income
|
1,293,299
|
|
|
1,170,236
|
|
|
123,063
|
|
|
11
|
%
|
|||
Provision for loan losses
|
151,529
|
|
|
417,709
|
|
|
(266,180
|
)
|
|
(64
|
)%
|
|||
Net interest income after provision for loan losses
|
1,141,770
|
|
|
752,527
|
|
|
389,243
|
|
|
52
|
%
|
|||
Other income
|
549,503
|
|
|
562,624
|
|
|
(13,121
|
)
|
|
(2
|
)%
|
|||
Other expense
|
677,027
|
|
|
595,148
|
|
|
81,879
|
|
|
14
|
%
|
|||
Income (loss) before income tax expense
|
1,014,246
|
|
|
720,003
|
|
|
294,243
|
|
|
41
|
%
|
|||
Income tax expense
|
383,240
|
|
|
255,111
|
|
|
128,129
|
|
|
50
|
%
|
|||
Net income
|
$
|
631,006
|
|
|
$
|
464,892
|
|
|
$
|
166,114
|
|
|
36
|
%
|
•
|
The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
|
•
|
The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;
|
•
|
The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;
|
•
|
The level and composition of other interest-bearing assets and liabilities, including our liquidity portfolio;
|
•
|
Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the Federal Funds rate and LIBOR;
|
•
|
The effectiveness of interest rate swaps in our interest rate risk management program; and
|
•
|
The difference between the carrying amount and future cash flows expected to be collected on PCI loans.
|
Average Balance Sheet Analysis
|
|||||||||||||||||||||
|
For the Three Months Ended
|
||||||||||||||||||||
|
February 29, 2012
|
|
February 28, 2011
|
||||||||||||||||||
|
Average
Balance |
|
Rate
|
|
Interest
|
|
Average
Balance |
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
3,377,637
|
|
|
0.26
|
%
|
|
$
|
2,198
|
|
|
$
|
4,224,045
|
|
|
0.24
|
%
|
|
$
|
2,539
|
|
Restricted cash
|
528,888
|
|
|
0.16
|
%
|
|
207
|
|
|
1,336,226
|
|
|
0.17
|
%
|
|
570
|
|
||||
Other short-term investments
|
—
|
|
|
—
|
%
|
|
—
|
|
|
375,000
|
|
|
1.07
|
%
|
|
988
|
|
||||
Investment securities
|
6,301,482
|
|
|
1.12
|
%
|
|
17,511
|
|
|
5,070,121
|
|
|
0.98
|
%
|
|
12,215
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Loan receivables
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)(3)
|
46,919,103
|
|
|
12.21
|
%
|
|
1,423,806
|
|
|
45,442,626
|
|
|
12.65
|
%
|
|
1,417,116
|
|
||||
Personal loans
|
2,721,311
|
|
|
12.26
|
%
|
|
82,975
|
|
|
1,941,372
|
|
|
11.71
|
%
|
|
56,055
|
|
||||
Federal student loans
(4)
|
487,459
|
|
|
1.62
|
%
|
|
1,961
|
|
|
780,176
|
|
|
1.55
|
%
|
|
2,986
|
|
||||
Private student loans
|
2,268,200
|
|
|
7.18
|
%
|
|
40,482
|
|
|
1,293,275
|
|
|
6.72
|
%
|
|
21,441
|
|
||||
PCI student loans
|
5,190,088
|
|
|
5.99
|
%
|
|
77,243
|
|
|
2,016,358
|
|
|
7.84
|
%
|
|
38,957
|
|
||||
Other
|
19,746
|
|
|
3.59
|
%
|
|
176
|
|
|
14,144
|
|
|
2.78
|
%
|
|
97
|
|
||||
Total loan receivables
|
57,605,907
|
|
|
11.36
|
%
|
|
1,626,643
|
|
|
51,487,951
|
|
|
12.10
|
%
|
|
1,536,652
|
|
||||
Total interest-earning assets
|
67,813,914
|
|
|
9.77
|
%
|
|
1,646,559
|
|
|
62,493,343
|
|
|
10.08
|
%
|
|
1,552,964
|
|
||||
Allowance for loan losses
|
(2,238,384
|
)
|
|
|
|
|
|
(3,263,819
|
)
|
|
|
|
|
||||||||
Other assets
|
4,000,572
|
|
|
|
|
|
|
3,880,381
|
|
|
|
|
|
||||||||
Total assets
|
$
|
69,576,102
|
|
|
|
|
|
|
$
|
63,109,905
|
|
|
|
|
|
||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(5)
|
$
|
26,247,063
|
|
|
2.95
|
%
|
|
192,199
|
|
|
$
|
25,529,818
|
|
|
3.58
|
%
|
|
225,548
|
|
||
Money market deposits
|
5,419,707
|
|
|
1.03
|
%
|
|
13,842
|
|
|
4,370,478
|
|
|
1.30
|
%
|
|
14,061
|
|
||||
Other interest-bearing savings deposits
|
8,042,152
|
|
|
1.14
|
%
|
|
22,732
|
|
|
4,753,066
|
|
|
1.46
|
%
|
|
17,086
|
|
||||
Total interest-bearing deposits
(6)
|
39,708,922
|
|
|
2.32
|
%
|
|
228,773
|
|
|
34,653,362
|
|
|
3.00
|
%
|
|
256,695
|
|
||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
10,088
|
|
|
0.04
|
%
|
|
1
|
|
|
93,828
|
|
|
0.20
|
%
|
|
46
|
|
||||
Securitized borrowings
(5)
|
16,032,211
|
|
|
2.11
|
%
|
|
84,184
|
|
|
16,398,963
|
|
|
2.09
|
%
|
|
84,411
|
|
||||
Other long-term borrowings
(5)
|
2,305,668
|
|
|
7.03
|
%
|
|
40,302
|
|
|
2,518,365
|
|
|
6.70
|
%
|
|
41,576
|
|
||||
Total borrowings
|
18,347,967
|
|
|
2.73
|
%
|
|
124,487
|
|
|
19,011,156
|
|
|
2.69
|
%
|
|
126,033
|
|
||||
Total interest-bearing liabilities
|
58,056,889
|
|
|
2.45
|
%
|
|
353,260
|
|
|
53,664,518
|
|
|
2.89
|
%
|
|
382,728
|
|
||||
Other liabilities and stockholders’ equity
|
11,519,213
|
|
|
|
|
|
|
9,445,387
|
|
|
|
|
|
||||||||
Total liabilities and stockholders’ equity
|
$
|
69,576,102
|
|
|
|
|
|
|
$
|
63,109,905
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
1,293,299
|
|
|
|
|
|
|
$
|
1,170,236
|
|
||||||
Net interest margin
(7)
|
|
|
9.03
|
%
|
|
|
|
|
|
9.22
|
%
|
|
|
||||||||
Net yield on interest-earning assets
(8)
|
|
|
7.67
|
%
|
|
|
|
|
|
7.59
|
%
|
|
|
||||||||
Interest rate spread
(9)
|
|
|
7.32
|
%
|
|
|
|
|
|
7.19
|
%
|
|
|
(1)
|
Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.
|
(2)
|
Interest income on credit card loans includes $45.6 million and $53.5 million of amortization of balance transfer fees for the
three
months ended
February 29, 2012
and
February 28, 2011
, respectively.
|
(3)
|
Includes the impact of interest rate swap agreements used to change a portion of certain floating-rate credit card loan receivables to fixed-rates.
|
(4)
|
Includes federal student loans held for sale, which were all sold during the first quarter of 2012.
|
(5)
|
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.
|
(6)
|
Includes the impact of FDIC insurance premiums and special assessments, and all periods reflect management's current product allocation methodology.
|
(7)
|
Net interest margin represents net interest income as a percentage of average total loan receivables.
|
(8)
|
Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
|
(9)
|
Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
|
Rate/Volume Variance Analysis
(1)
|
|||||||||||
|
For the Three Months Ended
February 29, 2012 vs. February 28, 2011
|
||||||||||
|
Volume
|
|
Rate
|
|
Total
|
||||||
Increase/(decrease) in net interest income due to changes in:
|
|
|
|
|
|
||||||
Interest-earning assets:
|
|
|
|
|
|
||||||
Cash and cash equivalents
|
$
|
(1,359
|
)
|
|
$
|
1,018
|
|
|
$
|
(341
|
)
|
Restricted cash
|
(316
|
)
|
|
(47
|
)
|
|
(363
|
)
|
|||
Other short-term investments
|
(988
|
)
|
|
—
|
|
|
(988
|
)
|
|||
Investment securities
|
3,326
|
|
|
1,970
|
|
|
5,296
|
|
|||
Loan receivables:
|
|
|
|
|
|
||||||
Credit card
|
196,772
|
|
|
(190,082
|
)
|
|
6,690
|
|
|||
Personal loans
|
24,087
|
|
|
2,833
|
|
|
26,920
|
|
|||
Federal student loans
|
(1,844
|
)
|
|
819
|
|
|
(1,025
|
)
|
|||
Private student loans
|
17,473
|
|
|
1,568
|
|
|
19,041
|
|
|||
PCI student loans
|
98,160
|
|
|
(59,874
|
)
|
|
38,286
|
|
|||
Other
|
45
|
|
|
34
|
|
|
79
|
|
|||
Total loan receivables
|
334,693
|
|
|
(244,702
|
)
|
|
89,991
|
|
|||
Total interest income
|
335,356
|
|
|
(241,761
|
)
|
|
93,595
|
|
|||
Interest-bearing liabilities:
|
|
|
|
|
|
||||||
Interest-bearing deposits:
|
|
|
|
|
|
||||||
Time deposits
|
39,846
|
|
|
(73,195
|
)
|
|
(33,349
|
)
|
|||
Money market deposits
|
12,747
|
|
|
(12,966
|
)
|
|
(219
|
)
|
|||
Other interest-bearing deposits
|
27,434
|
|
|
(21,788
|
)
|
|
5,646
|
|
|||
Total interest-bearing deposits
|
80,027
|
|
|
(107,949
|
)
|
|
(27,922
|
)
|
|||
Borrowings:
|
|
|
|
|
|
||||||
Short-term borrowings
|
(24
|
)
|
|
(21
|
)
|
|
(45
|
)
|
|||
Securitized borrowings
|
(5,402
|
)
|
|
5,175
|
|
|
(227
|
)
|
|||
Other long-term borrowings
|
(11,393
|
)
|
|
10,119
|
|
|
(1,274
|
)
|
|||
Total borrowings
|
(16,819
|
)
|
|
15,273
|
|
|
(1,546
|
)
|
|||
Total interest expense
|
63,208
|
|
|
(92,676
|
)
|
|
(29,468
|
)
|
|||
Net interest income
|
$
|
272,148
|
|
|
$
|
(149,085
|
)
|
|
$
|
123,063
|
|
(1)
|
The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between
February 29, 2012
and
February 28, 2011
based on the percentage of the rate or volume variance to the sum of the two absolute variances.
|
|
February 29,
2012 |
|
November 30,
2011 |
||||
Loans held for sale
|
$
|
—
|
|
|
$
|
714,180
|
|
Loan portfolio:
|
|
|
|
||||
Credit card loans:
|
|
|
|
||||
Discover card
|
45,708,205
|
|
|
46,419,544
|
|
||
Discover business card
|
209,393
|
|
|
219,081
|
|
||
Total credit card loans
|
45,917,598
|
|
|
46,638,625
|
|
||
Other loans:
|
|
|
|
||||
Personal loans
|
2,783,506
|
|
|
2,648,051
|
|
||
Private student loans
|
2,446,972
|
|
|
2,069,001
|
|
||
Other
|
27,039
|
|
|
16,690
|
|
||
Total other loans
|
5,257,517
|
|
|
4,733,742
|
|
||
PCI student loans
(1)
|
5,124,146
|
|
|
5,250,388
|
|
||
Total loan portfolio
|
56,299,261
|
|
|
56,622,755
|
|
||
Total loan receivables
|
56,299,261
|
|
|
57,336,935
|
|
||
Allowance for loan losses
|
(1,978,591
|
)
|
|
(2,205,196
|
)
|
||
Net loan receivables
|
$
|
54,320,670
|
|
|
$
|
55,131,739
|
|
(1)
|
Represents purchased credit-impaired private student loans which do not have a related allowance for loan losses or charge-offs (see Note 4: Loan Receivables to our condensed consolidated financial statements).
|
•
|
The impact of general economic conditions on the consumer, including unemployment levels, bankruptcy trends and interest rate movements;
|
•
|
Changes in consumer spending and payment behaviors;
|
•
|
Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio;
|
•
|
The level and direction of historical and anticipated loan delinquencies and charge-offs;
|
•
|
The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and effectiveness of collection efforts; and
|
•
|
Regulatory changes or new regulatory guidance.
|
(1)
|
Charge-offs for PCI loans did not result in a charge to earnings during 2012 or 2011 and are therefore excluded from the calculation. See Note 4: Loan Receivables to our condensed consolidated financial statements for more information regarding the accounting for charge-offs on PCI loans.
|
The following table presents the amounts and delinquency rates of key loan portfolio segments that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest, regardless of delinquency and restructured loans (dollars in thousands):
|
|||||||||||||
|
February 29,
2012 |
|
November 30,
2011 |
||||||||||
|
$
|
|
%
|
|
$
|
|
%
|
||||||
Loans 30 days delinquent or more:
|
|
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
1,018,959
|
|
|
2.22
|
%
|
|
$
|
1,116,851
|
|
|
2.39
|
%
|
Personal loans
|
$
|
22,600
|
|
|
0.81
|
%
|
|
$
|
22,966
|
|
|
0.87
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
22,656
|
|
|
0.93
|
%
|
|
$
|
13,065
|
|
|
0.63
|
%
|
|
|
|
|
|
|
|
|
||||||
Loans 90 days delinquent or more:
|
|
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
540,164
|
|
|
1.18
|
%
|
|
$
|
559,674
|
|
|
1.20
|
%
|
Personal loans
|
$
|
8,484
|
|
|
0.30
|
%
|
|
$
|
7,362
|
|
|
0.28
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
3,223
|
|
|
0.13
|
%
|
|
$
|
2,992
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
||||||
Loans not accruing interest
|
$
|
190,458
|
|
|
0.37
|
%
|
|
$
|
207,138
|
|
|
0.40
|
%
|
|
|
|
|
|
|
|
|
||||||
Restructured loans
|
|
|
|
|
|
|
|
||||||
Credit card loans
(2)
|
$
|
1,197,087
|
|
|
2.61
|
%
|
|
$
|
1,216,738
|
|
|
2.61
|
%
|
Personal loans
|
$
|
8,100
|
|
|
0.29
|
%
|
|
$
|
7,635
|
|
|
0.29
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
7,530
|
|
|
0.31
|
%
|
|
$
|
5,439
|
|
|
0.26
|
%
|
(1)
|
Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing.
|
(2)
|
Restructured loans include $36.4 million and $37.9 million at February 29, 2012 and November 30, 2011, respectively, that are also included in loans over 90 days delinquent or more.
|
|
For the Three Months Ended
|
|
2012 vs. 2011
increase
(decrease)
|
|||||||||||
February 29, 2012
|
|
February 28, 2011
|
|
$
|
|
%
|
||||||||
Discount and interchange revenue
(1)
|
$
|
264,311
|
|
|
$
|
260,916
|
|
|
$
|
3,395
|
|
|
1
|
%
|
Protection products
|
104,861
|
|
|
108,553
|
|
|
(3,692
|
)
|
|
(3
|
)%
|
|||
Loan fee income
|
84,451
|
|
|
85,600
|
|
|
(1,149
|
)
|
|
(1
|
)%
|
|||
Transaction processing revenue
|
52,481
|
|
|
42,551
|
|
|
9,930
|
|
|
23
|
%
|
|||
Merchant fees
|
3,705
|
|
|
4,655
|
|
|
(950
|
)
|
|
(20
|
)%
|
|||
Gain on investments
|
—
|
|
|
141
|
|
|
(141
|
)
|
|
(100
|
)%
|
|||
Other income
|
39,694
|
|
|
60,208
|
|
|
(20,514
|
)
|
|
(34
|
)%
|
|||
Total other income
|
$
|
549,503
|
|
|
$
|
562,624
|
|
|
$
|
(13,121
|
)
|
|
(2
|
)%
|
(1)
|
Net of rewards, including
Cashback Bonus
rewards, of $236 million and $207 million for the
three
months ended
February 29, 2012
and
February 28, 2011
, respectively.
|
|
For the Three Months Ended
|
|
2012 vs. 2011
increase
(decrease)
|
|||||||||||
|
February 29, 2012
|
|
February 28, 2011
|
|
$
|
|
%
|
|||||||
Employee compensation and benefits
|
$
|
246,725
|
|
|
$
|
213,075
|
|
|
$
|
33,650
|
|
|
16
|
%
|
Marketing and business development
|
131,429
|
|
|
135,665
|
|
|
(4,236
|
)
|
|
(3
|
)%
|
|||
Information processing and communications
|
70,463
|
|
|
64,717
|
|
|
5,746
|
|
|
9
|
%
|
|||
Professional fees
|
99,500
|
|
|
90,331
|
|
|
9,169
|
|
|
10
|
%
|
|||
Premises and equipment
|
17,309
|
|
|
17,248
|
|
|
61
|
|
|
—
|
%
|
|||
Other expense
|
111,601
|
|
|
74,112
|
|
|
37,489
|
|
|
51
|
%
|
|||
Total other expense
|
$
|
677,027
|
|
|
$
|
595,148
|
|
|
$
|
81,879
|
|
|
14
|
%
|
The following table reconciles the Company’s effective tax rate to the U.S. federal statutory income tax rate:
|
|||||
|
For the Three Months Ended
|
||||
|
February 29, 2012
|
|
February 28, 2011
|
||
U.S. federal statutory income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
U.S. state, local and other income taxes, net of U.S. federal income tax benefits
|
3.2
|
|
|
0.9
|
|
Other
|
(0.4
|
)
|
|
(0.5
|
)
|
Effective income tax rate
|
37.8
|
%
|
|
35.4
|
%
|
|
Total
|
|
Three
Months
or Less
|
|
Over Three
Months
Through Six
Months
|
|
Over Six
Months
Through
Twelve
Months
|
|
Over Twelve
Months
|
|
Indeterminate
|
||||||||||||
Certificates of deposit in amounts less than $100,000
(1)
|
$
|
19,524,743
|
|
|
$
|
2,815,472
|
|
|
$
|
2,463,544
|
|
|
$
|
3,130,363
|
|
|
$
|
11,115,364
|
|
|
$
|
—
|
|
Certificates of deposit in amounts of $100,000 to less than $250,000
(1)
|
5,293,246
|
|
|
608,870
|
|
|
745,590
|
|
|
1,258,132
|
|
|
2,680,654
|
|
|
—
|
|
||||||
Certificates of deposit in amounts of $250,000
(1)
or greater
|
1,179,288
|
|
|
140,604
|
|
|
171,861
|
|
|
305,733
|
|
|
561,090
|
|
|
—
|
|
||||||
Savings deposits, including money market deposit accounts
|
14,017,348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,017,348
|
|
||||||
Total interest-bearing deposits
|
$
|
40,014,625
|
|
|
$
|
3,564,946
|
|
|
$
|
3,380,995
|
|
|
$
|
4,694,228
|
|
|
$
|
14,357,108
|
|
|
$
|
14,017,348
|
|
(1)
|
$100,000 represents the basic insurance amount previously covered by the FDIC. Effective July 21, 2010, the basic insurance per depositor was permanently increased to $250,000.
|
|
Total
|
|
Less Than
One Year
|
|
One Year
Through
Three Years
|
|
Four Years
Through
Five Years
|
|
After Five
Years
|
||||||||||
Scheduled maturities of long-term borrowings—owed to credit card securitization investors
|
$
|
14,293,343
|
|
|
$
|
5,418,019
|
|
|
$
|
6,875,775
|
|
|
$
|
999,639
|
|
|
$
|
999,910
|
|
|
For the Three Months Ended February 29, 2012
|
|
For the Three Months Ended February 28, 2011
|
||||
|
Maximum Daily Balance During the Period
|
|
Maximum Daily Balance During the Period
|
||||
Overnight Federal Funds purchased
|
$
|
135,000
|
|
|
$
|
120,000
|
|
Overnight repurchase agreements
|
$
|
—
|
|
|
$
|
48,188
|
|
(1)
|
An “sf” in the rating denotes an identification for structured finance product ratings that was implemented for these products by the rating agencies as of September 2010.
|
(2)
|
All Class C notes are currently held by subsidiaries of Discover Bank and, therefore, are not publicly rated.
|
(1)
|
Cash-in-process is excluded from cash and cash equivalents for liquidity purposes.
|
(2)
|
See "—Funding Sources—Additional Funding Sources" for additional information.
|
(3)
|
Excludes $275 million and $276 million of investments accounted for in the liquidity portfolio that were pledged to the Federal Reserve as of
February 29, 2012
and
November 30, 2011
, respectively.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 1.
|
Legal Proceedings
|
Item 1A.
|
Risk Factors
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Period
|
Total Number of Shares Purchased
|
|
Average Price Paid Per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
(1)
|
|
Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs
(1)
|
||||||
December 1- 31, 2011
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Employee transactions
(2)
|
71,864
|
|
|
$
|
23.97
|
|
|
N/A
|
|
N/A
|
|||
January 1 - 31, 2012
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Employee transactions
(2)
|
526,694
|
|
|
$
|
24.00
|
|
|
N/A
|
|
N/A
|
|||
February 1 - 29, 2012
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Employee transactions
(2)
|
144
|
|
|
$
|
27.72
|
|
|
N/A
|
|
N/A
|
|||
|
|
|
|
|
|
|
|
||||||
Total
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Employee transactions
(2)
|
598,702
|
|
|
$
|
24.00
|
|
|
N/A
|
|
N/A
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
Item 5.
|
Other Information
|
Item 6.
|
Exhibits
|
|
Discover Financial Services
(Registrant)
|
||
|
|
|
|
|
By:
|
|
/s/ R. Mark Graf
|
|
|
|
R. Mark Graf
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
|
Exhibit
Number
|
|
Description
|
10.1
|
|
Form 2012 Award Certificate for Restricted Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan.
|
|
|
|
10.2
|
|
Form 2012 Award Certificate for Performance Stock Units Under Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan.
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
|
|
|
101.INS
|
|
XBRL Instance Document.
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document.
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
1.
|
Stock units generally
|
3
|
2.
|
Vesting schedule and conversion
|
4
|
3.
|
Special provisions for certain employee
|
4
|
4.
|
Dividend equivalent payments
|
4
|
5.
|
Death and Disability and Retirement
|
5
|
6.
|
Reduction in Force
|
5
|
7.
|
Change in Control
|
5
|
8.
|
Termination of Employment and cancellation of awards
|
6
|
9.
|
Cancelation of Awards under Certain Circumstances
|
6
|
10.
|
Tax and other withholding obligations
|
7
|
11.
|
Satisfaction of obligations
|
7
|
12.
|
Nontransferability
|
8
|
13.
|
Designation of a beneficiary
|
8
|
14.
|
Ownership and possession
|
9
|
15.
|
Securities law matters
|
9
|
16.
|
Compliance with laws and regulations
|
9
|
17.
|
No entitlements
|
9
|
18.
|
Consents under local law
|
10
|
19.
|
Award modification
|
10
|
20.
|
Severability
|
11
|
21
|
Successors
|
11
|
22.
|
Governing law
|
11
|
23.
|
Section 409A
|
11
|
24.
|
Defined terms
|
12
|
1.
|
Stock units generally
.
|
2.
|
Vesting schedule and conversion
.
|
(a)
|
Vesting schedule.
Your RSUs will vest according to the following schedule: (i) 25% of your RSUs will vest on the First Scheduled Vesting Date, (ii) 25% of your RSUs will vest on the Second Scheduled Vesting Date, (iii) 25% of your RSUs will vest on the Third Scheduled Vesting Date and (iv) the remaining 25% of your RSUs will vest on the Fourth Scheduled Vesting Date. Any fractional RSUs resulting from the application of the vesting schedule will be aggregated and will vest on the First Scheduled Vesting Date. Except as otherwise provided in this Award Certificate, each portion of your RSUs will vest only if you continue to provide future services to the Company by remaining in continuous Employment through the applicable Scheduled Vesting Date and providing value added services to the Company during this timeframe. The special vesting terms set forth in Sections 5, 6 and 7 of this Award Certificate apply (i) if your Employment terminates by reason of your death, Disability, or Retirement, (ii) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 6, or (iii) upon a Change in Control. Vested RSUs are subject to the tax withholding provisions set forth in this Award Certificate.
|
(b)
|
Conversion.
|
(1)
|
Except as otherwise provided in this Award Certificate, each of your vested RSUs will convert to one share of Discover common stock on the applicable Scheduled Vesting Date.
|
(2)
|
Shares to which you are entitled upon conversion of RSUs under any provision of this Award Certificate shall be delivered as soon as administratively practicable thereafter and shall not be subject to any transfer restrictions, other than those that may arise under the securities laws or Discover's policies.
|
3.
|
Special provisions for certain employees
.
|
(a)
|
Six-month delay for specified employees.
Notwithstanding the other provisions of this Award Certificate, to the extent necessary to comply with Section 409A of the Internal Revenue Code, if Discover reasonably considers you to be one of its “specified employees” as defined in Section 409A of the Internal Revenue Code at the time of the termination of your Employment, any RSUs to which you are entitled under this Award Certificate that constitute a deferred compensation arrangement under section 409A of the Internal Revenue Code will not convert to Discover common stock until the date that is six months after the termination of your Employment.
|
4.
|
Dividend equivalent payments
.
|
5.
|
Death and Disability and Retirement
.
|
(a)
|
Death.
If your Employment terminates due to your death, all unvested RSUs subject to this Award Certificate will vest on the date your Employment terminates. On that date, your RSUs will convert to shares of Discover common stock and be delivered to the beneficiary you have designated pursuant to Section 13 or the legal representative of your estate, as applicable, as soon as administratively practicable after Discover receives appropriate notice of your death.
|
(b)
|
Disability.
If your Employment terminates due to Disability, all unvested RSUs subject to this Award Certificate will vest on the date your Employment terminates. On that date, your RSUs will convert to shares of Discover common stock and be delivered to you, subject to Section 3(a) above, as soon as administratively practicable thereafter.
|
(c)
|
Retirement.
If your Employment terminates due to your Retirement, all of your unvested stock units will vest on the date your Employment terminates. On that date, your RSUs will convert to shares of Discover common stock and be delivered to you, subject to Section 3(a) above, as soon as administratively practicable thereafter.
|
6.
|
Reduction in Force
.
|
7.
|
Change in Control
.
|
(a)
|
If the Company terminates your Employment, or if you terminate your Employment for Good Reason, other than for Cause, within six months prior to or within 24 months after a Change in Control, all your RSUs will immediately vest upon such Change in Control. On the later of the date of a Change in Control and the date of your termination following a Change in Control, as applicable, your RSUs will vest and convert to shares of Discover common stock and be delivered as soon as administratively practicable thereafter.
|
(b)
|
In the event of a Change in Control which results from a transaction pursuant to which the shareholders of Discover receive shares of common stock of an acquiring entity (the “
Acquirer
”) that are registered under Section 12 of the Exchange Act (as defined in Section 24(c)(1)), unless otherwise determined by the Committee, in its sole discretion prior to such Change in Control, there shall be substituted for each
|
(c)
|
In the event of a Change in Control which results from a transaction pursuant to which the shareholders of Discover receive consideration other than shares of common stock of the Acquirer that are registered under Section 12 of the Exchange Act, the value of the RSUs hereunder shall, unless otherwise determined by the Committee, in its sole discretion prior to such Change in Control, be converted into a right to receive the cash or other consideration received by the shareholders of Discover in such transaction, and this Award Certificate shall otherwise continue in effect.
|
8.
|
Termination of Employment and cancellation of awards
.
|
(a)
|
Cancellation of unvested awards.
Your unvested RSUs will be canceled if your Employment terminates for any reason other than under the circumstances set forth in this Award Certificate for death, Disability, and Retirement described in Section 5 or an involuntary termination by the Company described in Section 6 or in connection with a Change in Control as provided in Section 7.
|
(b)
|
General treatment of vested awards.
Except as otherwise provided in this Award Certificate, your vested RSUs will convert to shares of Discover common stock on the applicable Scheduled Vesting Date. The tax and other withholding provisions set forth in this Award Certificate will continue to apply until the date the shares of Discover common stock are delivered.
|
9.
|
Cancellation of Awards under Certain Circumstances
.
|
10.
|
Tax and other withholding obligations
.
|
11.
|
Satisfaction of obligations
.
|
(a)
|
Upon conversion of RSUs, including any accelerated conversion pursuant to Sections 5, 6 or 7 above, or, if later, upon delivery of the shares of Discover
|
(b)
|
Discover may withhold the payment of dividend equivalents on your RSUs or any other compensation or payments due from Discover to ensure satisfaction of any obligation that you owe the Company or any tax or other withholding obligations or Discover may permit you to satisfy such tax or other withholding obligation by paying such obligation in immediately available funds.
|
12.
|
Nontransferability
.
|
13.
|
Designation of a beneficiary
.
|
(a)
|
Generally.
Generally, you will not have any rights as a stockholder in the shares of Discover common stock corresponding to your RSUs prior to conversion of your RSUs.
|
(b)
|
Following conversion.
Following conversion of your RSUs you will be the beneficial owner of the net shares issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on the shares.
|
15.
|
Securities law matters
.
|
16.
|
Compliance with laws and regulations
.
|
17.
|
No entitlements
.
|
(a)
|
No right to continued Employment.
This RSU Award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Company or your Employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your Employment by the Company or a Related Employer, or as giving you any right to continue in the employ of the Company
|
(b)
|
No right to future awards.
This award, and all other awards of RSUs and other equity-based awards, are discretionary. This award does not confer on you any right or entitlement to receive another award of RSUs or any other equity-based award at any time in the future or in respect of any future period.
|
(c)
|
No effect on future employment compensation.
Discover has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the Company's discretion to determine the amount, if any, of your compensation. In addition, this award is not part of your base salary or wages and will not be taken into account in determining any other Employment-related rights you may have, such as rights to pension or severance pay.
|
(d)
|
In the event of any conflict between any terms applicable to equity awards in any employment agreement, offer letter or other arrangement that you have entered into with the Company and the terms set forth in this Award Certificate, the latter shall control. In the event of any conflict between the terms set forth in this Award Certificate and the terms of the Plan, the latter shall control.
|
18.
|
Consents under local law
.
|
19.
|
Award modification
.
|
20.
|
Severability
.
|
21.
|
Successors
.
|
22.
|
Governing law
.
|
23.
|
Section 409A.
|
24.
|
Defined terms
.
|
(a)
|
“
Board
”
means the Board of Directors of Discover.
|
(b)
|
“Cause”
means:
|
(1)
|
any act or omission which constitutes a material breach of your obligations to the Company or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to Disability) within ten (10) business days after written notification thereof to you by the Company;
|
(2)
|
any act or omission by you that constitutes (x) fraud or intentional misrepresentation, (y) embezzlement, misappropriation or conversion of assets of, or business opportunities considered by, the Company or (z) any other act which has caused or may reasonably be expected to cause material injury to the interest or business reputation of the Company; or
|
(3)
|
your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Company is a member or of any policy of the Company relating to compliance with any of the foregoing.
|
(c)
|
A
“Change in Control”
means, except as provided otherwise below, the first to occur of any of the following events:
|
(1)
|
except as otherwise provided in clause (3) below, any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”), as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (i) any employee plan established by the Company or any of its Subsidiaries, (ii) any group of employees holding shares subject to agreements relating to the voting of such shares, (iii) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, either (x) acquires ownership of stock of the Company that, together with stock held by such person (not including the stock owned by such person any stock acquired directly from the Company other than in connection with the acquisition by the Company of a business), constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company (but only if such person did not own more than 50% of the total fair market value of the stock of the Company prior to the acquisition of additional stock), or (y) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person) ownership of the stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company (but
|
(2)
|
a change in the composition of the Board during any twelve-month period, such that individuals who, as of the Date of the Award, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board;
provided, however,
that any individual becoming a member of the Board subsequent to the date of Date of the Award whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board;
|
(3)
|
the consummation of a merger or consolidation of the Company with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (i) a merger or consolidation which results in the securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (determined pursuant to clause (1) above) is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional securities);
|
(4)
|
the complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company's stock, (ii) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, either by the Company or by a person or more than one person acting as a group, that owns fifty percent (50%) or more of
|
(d)
|
“Committee”
means the Compensation Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.
|
(e)
|
The
“
Company
”
means Discover and all of its Subsidiaries.
|
(f)
|
“
Competitive Activity”
means:
|
(g)
|
“Competitor”
means any corporation, partnership or other entity that engages in (or that owns a significant interest in any corporation, partnership or other entity that engages in) (i) the business of consumer lending, including, without limitation, credit card issuance or electronic payment services, or (ii) any other business in which you
|
(h)
|
“
Date of the Award
”
means December 9, 2011.
|
(i)
|
“
Disability
”
means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal Revenue Code.
|
(j)
|
“Discover”
means Discover Financial Services, a Delaware corporation.
|
(k)
|
“Employed”
and
“Employment”
refer to employment with the Company and/or Related Employment.
|
(l)
|
“First Scheduled Vesting Date”
means January 2, 2013.
|
(m)
|
“Fourth Scheduled Vesting Date”
means January 2, 2016.
|
(n)
|
“Good Reason”
means the occurrence of any of the following upon, or within six (6) months prior to or twenty-four (24) months after the occurrence of a Change in Control of Discover without your prior written consent:
|
(1)
|
(A) any material diminution in your assigned duties, responsibilities and/or authority, including the assignment to you of any duties, responsibilities or authority inconsistent with the duties, responsibilities and authority assigned to you, immediately prior to such assignment, or (B) a material diminution in the authority, duties, or responsibilities of the supervisor to whom you are required to report;
|
(2)
|
any material reduction in your base compensation;
provided, however
, that Company-initiated across-the-board reductions in compensation affecting substantially all eligible Company employees shall alone not be considered “Good Reason,” unless the compensation reductions exceed twenty percent (20%) of your base compensation;
|
(3)
|
A material diminution of the budget over which you have authority;
|
(4)
|
The Company's requiring you to be based at a location that (A) is in excess of thirty-five (35) miles from the location of your principal job location or office immediately prior to the Change in Control, or (B) results in an increase in your normal daily commuting time by more than ninety (90) minutes, except for required travel on Company's business to an extent substantially consistent with your then present business travel obligations; or
|
(5)
|
Any other action or inaction that constitutes a material breach by the Company of any agreement pursuant to which you provide services to the Company.
|
(o)
|
“
Internal Revenue Code
”
means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.
|
(p)
|
“Legal Requirement”
means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.
|
(q)
|
“
Plan
”
means the Discover Financial Services Omnibus Incentive Plan, as in effect from time to time.
|
(r)
|
“
Related Employment
”
means your employment with an employer other than the Company (such employer, herein referred to as a “
Related Employer
”),
provided
: (i) you undertake such employment at the written request or with the written consent of Discover's Head of Human Resources; (ii) immediately prior to undertaking such employment you were an employee of the Company or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Company in its discretion as Related Employment; and,
provided
further
that the Company may (1) determine at any time in its sole discretion that employment that was recognized by the Company as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Company may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Company, or otherwise modify your and the Company's respective rights and obligations.
|
(s)
|
“
Retirement
” means the termination of your Employment by you or by the Company for any reason other than for Cause and other than due to your death or Disability, on or after the date on which:
|
(1)
|
you have attained age 55 and completed at least 5 years of service with the Company; or
|
(2)
|
you have attained age 65, whichever occurs first.
|
(t)
|
“
Scheduled Vesting Date
” means the First Scheduled Vesting Date, the Second Scheduled Vesting Date, the Third Scheduled Vesting Date and/or the Fourth Scheduled Vesting Date as the context requires.
|
(u)
|
“Second Scheduled Vesting Date”
means January 2, 2014.
|
(v)
|
“Subsidiary”
means (i) a corporation or other entity with respect to which Discover, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation's board of directors or analogous governing body, or (ii) any other corporation or other entity in which Discover, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.
|
(w)
|
“Third Scheduled Vesting Date”
means January 2, 2015.
|
(x)
|
“Wrongful Solicitation”
occurs upon either of the following events:
|
(1)
|
while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within one year after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Company employee to leave the Company or become hired or engaged by another firm;
provided
,
however
, that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the one year preceding notice of the termination of your Employment; or
|
(2)
|
while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within one year after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Company (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Company or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Company is engaged (other than the Company);
provided
,
however
, that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the one year preceding notice of the termination of your Employment.
|
Beneficiary(ies) Name
|
Relationship
|
Percentage
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
1.
|
Performance stock units generally
|
4
|
2.
|
Performance Measures
|
4
|
3.
|
Vesting schedule and conversion
|
4
|
4.
|
Special provisions for certain employees
|
6
|
5.
|
Dividend equivalent payments
|
6
|
6.
|
Death and Disability and Retirement
|
7
|
7.
|
Reduction in Force
|
7
|
8.
|
Change in Control
|
8
|
9.
|
Termination of Employment and cancellation of awards
|
8
|
10.
|
Tax and other withholding obligations
|
9
|
11.
|
Satisfaction of obligations
|
10
|
12.
|
Nontransferability
|
10
|
13.
|
Designation of a beneficiary
|
10
|
14.
|
Ownership and possession
|
11
|
15.
|
Securities law matters
|
11
|
16.
|
Compliance with laws and regulations
|
11
|
17.
|
No entitlements
|
12
|
18.
|
Consents under local law
|
12
|
19.
|
Award modification
|
12
|
20.
|
Severability
|
13
|
21.
|
Successors
|
13
|
22.
|
Governing law
|
13
|
23.
|
Section 409A
|
13
|
24.
|
Defined terms
|
14
|
1.
|
Performance stock units generally
.
|
2.
|
Performance Measures.
|
•
|
If the Discover EPS is less than the EPS Minimum, the multiplier will be zero.
|
•
|
If the Discover EPS equals the EPS Minimum, the multiplier will be 0.5.
|
•
|
If the Discover EPS equals the EPS Target, the multiplier will be 1.
|
•
|
If the Discover EPS equals or is greater than the EPS Maximum, the multiplier will be 2.
|
•
|
If the Discover EPS is between EPS Minimum and EPS Target, then the multiplier will be obtained by straight-line interpolation between the EPS Minimum and EPS Target.
|
•
|
If the Discover EPS is between EPS Target and EPS Maximum, then the multiplier will be obtained by straight-line interpolation between the EPS Target and EPS Maximum.
|
3.
|
Vesting schedule and conversion
.
|
(a)
|
Vesting schedule.
Except as otherwise provided in this Award Certificate, you will vest in any PSUs that are earned in accordance with Section 2 on the Scheduled Vesting Date. Except as otherwise provided in this Award Certificate, PSUs will vest only if you continue to provide future services to the Company by remaining in continuous Employment through the Scheduled Vesting Date. The special vesting terms set forth in Sections 6, 7 and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death, Disability, or Retirement, (ii) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 7, or (iii) upon a Change in Control. Vested PSUs are subject to the tax withholding provisions set forth in Section 10 of this Award Certificate.
|
(b)
|
Conversion.
Except as otherwise provided in this Award Certificate, your PSUs, to the extent earned and vested, will convert to shares of Discover common stock (rounded to the nearest whole share) on the Scheduled Vesting Date.
The special conversion provisions set forth in Sections 6, 7 and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death, Disability, or Retirement, (ii) if the Company terminates your Employment in an involuntary termination under the circumstances described in Section 7, or (iii) upon a Change in Control.
|
(c)
|
Clawback.
In the event and to the extent the Committee reasonably determines that the performance certified by the Committee, and on the basis of which PSUs were converted to shares of Discover common stock, was based on Discover's material noncompliance with any financial reporting requirement under the securities laws which requires Discover to file a restatement of its financial statements, you will be obligated to repay to the Company:
|
(i)
|
the number of shares that were delivered upon conversion of your PSUs during the 3-year period preceding the date on which the Company is required to prepare an accounting restatement, less the number of shares that would have been delivered had your PSUs converted to shares based on compliance with any such financial reporting requirement under the securities laws (such number of shares determined in each case by the Committee in its sole discretion and before satisfaction of tax or other withholding obligations pursuant to Section 10) (the “Clawback Shares”); you shall transfer to the Company (i) the Clawback Shares net of taxes or (ii) an amount equal to the number of Clawback Shares so transferred multiplied by the fair market value net of taxes, determined using a valuation methodology established by the Company, of Company common stock on the date your PSUs converted to shares of Company common stock; plus
|
(ii)
|
any dividend equivalents that were paid on the Clawback Shares when your PSUs converted to shares.
|
(d)
|
Accelerated conversion.
Discover shall have no right to accelerate the conversion of any of your PSUs or the payment of any of your dividend equivalents, except to the extent that such acceleration is not prohibited by Section 409A of the Internal Revenue Code and would not result in your being required to recognize income for United States federal income tax purposes before your PSUs convert to shares of Discover common stock or your dividend equivalents are paid or your incurring additional tax or interest under Section 409A of the Internal Revenue Code. If the Committee, in its sole discretion, determines that any PSUs are converted to shares of Discover common stock or any dividend equivalents are paid prior to the Scheduled Vesting Date pursuant to this Section 3(d), these shares or dividend equivalents may not be transferable and may remain subject to applicable vesting, cancellation and withholding provisions, as determined by the Committee in its sole discretion.
|
(e)
|
Rule of construction for timing of conversion.
Whenever this Award Certificate provides for your PSUs to convert to shares, or your dividend equivalents to be paid, on the Scheduled Vesting Date or upon a different specified event or date, such conversion or payment will be considered to have been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Company for damages based on a delay in conversion
|
(a)
|
Death.
If you die, then the number of PSUs that will vest, and the number of shares of Discover common stock the beneficiary you have designated pursuant to Section 13 or the legal representative of your estate, as applicable, will receive will be determined by multiplying (i) the number of shares earned based on the performance measures set forth in Section 2 had you remained in Employment through the Scheduled Vesting Date by (ii) the Pro Ration Fraction, provided that your beneficiary or estate promptly notifies the Company of your death. Any such shares of Discover common stock will vest and convert to shares of Common Stock on the Scheduled Vesting Date and will be delivered as soon as administratively practicable following the Scheduled Vesting Date.
|
(b)
|
Disability; Retirement.
If your Employment terminates due to Disability or Retirement, then, subject to Section 3(c) above, any transfer restrictions and the cancellation provisions described herein, the number of PSUs that you will receive will be determined by multiplying (i) the number of shares that would have been delivered to you, based on the performance measures described in Section 2, had you remained in Employment through the Scheduled Vesting Date, by (ii) the Pro Ration Fraction. These shares will vest and convert to shares of Common Stock on the Scheduled Vesting Date and be delivered to you as soon as administratively practicable thereafter.
|
(a)
|
If, during the first year of the Performance Period, a Change in Control occurs, then your Target Award (including the value of any dividend equivalents theretofore credited to you) will be converted to a cash award valued as of date of the Change in Control event as determined by the Company using the EPS Target multiplier set forth in Section 2, the use of which shall be deemed to be a valuation using the target level. Any such cash award will be delivered to you (subject to Section 3(c) above and the cancellation provisions set forth herein) as soon as administratively practicable following the sooner to occur of (i) the Scheduled Vesting Date or (ii) the date when the Company terminates your Employment, or if you terminate your Employment for Good Reason, other than for Cause. Notwithstanding the foregoing, if, following the Change in Control event but prior to the delivery of such cash award, you voluntarily terminate your Employment other than for Good Reason or you are terminated for Cause, you will forfeit such cash award.
|
(b)
|
If, after the first year of the Performance Period, a Change in Control occurs, then your Target Award (including the value of any dividend equivalents theretofore credited to you) will be converted to a cash award valued as of date of the Change in Control event as determined by the Company based on the performance measures in Section 2 but applied as though the Performance Period ended with the last quarter of Discover ending simultaneously with or before the effective date of the Change in Control, the use of which shall be deemed to be a valuation using the target level. Any such cash award will be delivered to you (subject to Section 3(c) above and the cancellation provisions set forth herein) as soon as administratively practicable following the sooner to occur of (i) the Scheduled Vesting Date or (ii) the date when the Company terminates your Employment, or if you terminate your Employment for Good Reason, other than for Cause. Notwithstanding the foregoing, if, following the Change in Control event but prior to the delivery of such cash award, you voluntarily terminate your Employment other than for Good Reason or you are terminated for Cause, you will forfeit such cash award.
|
(a)
|
Cancellation of unvested awards.
Your unvested PSUs, including any dividend equivalents theretofore credited to you, will be canceled if your Employment terminates for any reason other than under the circumstances set forth in this Award Certificate for death, Disability, and Retirement described in Section 6 or an involuntary termination by the Company described in Section 7 or in connection with a Change in Control as provided in Section 8.
|
(b)
|
General treatment of vested awards.
Except as otherwise provided in this Award Certificate, your vested PSUs will convert to shares of Discover common stock on the Scheduled Vesting Date. The tax and other withholding provisions as set forth in Section 10 of this Award Certificate will continue to apply until the date the shares of Discover common stock are delivered.
|
(c)
|
Cancellation of awards under certain circumstances.
The cancellation events set forth in this Section 9(c) are designed, among other things, to incentivize compliance with the Company's policies (including, without limitation, the Company's risk policy and Code of Conduct), to
|
11.
|
Satisfaction of obligations
.
|
(a)
|
Upon conversion of PSUs, including any accelerated conversion pursuant to Sections 6, 7 or 8 above, or, if later, upon delivery of the shares of Discover common stock, Discover may withhold a number of shares sufficient to satisfy any obligation that you owe to the Company and any tax or other withholding obligations. The Company shall determine the number of shares to be withheld by dividing the dollar value of your obligation to the Company and any tax or other withholding obligations by the fair market value of Discover common stock on the date the shares of Discover common stock are scheduled to convert, or otherwise become taxable, as applicable.
|
(b)
|
Discover may withhold the payment of dividend equivalents on your PSUs or any other compensation or payments due from Discover to ensure satisfaction of any obligation that you owe the Company or any tax or other withholding obligations or Discover may permit you to satisfy such tax or other withholding obligation by paying such obligation in immediately available funds.
|
12.
|
Nontransferability
.
|
13.
|
Designation of a beneficiary
.
|
(a)
|
Generally.
You will not have any rights as a stockholder in the shares of Discover common stock corresponding to your PSUs prior to conversion of your PSUs.
|
(b)
|
Following conversion.
Subject to the terms and conditions of this Award Certificate, following conversion of your PSUs you will be the beneficial owner of the net shares issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on the shares.
|
15.
|
Securities law matters
.
|
16.
|
Compliance with laws and regulations
.
|
17.
|
No entitlements
.
|
(a)
|
No right to continued Employment.
This PSU Award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Company or your Employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your Employment by the Company or a Related Employer, or as giving you any right to continue in the employ of the Company or a Related Employer, during any period (including without limitation the period between the Date of the Award and the Scheduled Vesting Date or any portion of this period), nor shall they be construed as giving you any right to be reemployed by the Company or a Related Employer following any termination of Employment.
|
(b)
|
No right to future awards.
This award, and all other awards of PSUs and other equity-based awards, are discretionary. This award does not confer on you any right or entitlement to receive another award of PSUs or any other equity-based award at any time in the future or in respect of any future period.
|
(c)
|
No effect on future employment compensation.
Discover has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the Company's discretion to determine the amount, if any, of your compensation. In addition, this award is not part of your base salary or wages and will not be taken into account in determining any other Employment-related rights you may have, such as rights to pension or severance pay.
|
(d)
|
Award Terms Control.
In the event of any conflict between any terms applicable to equity awards in any employment agreement, offer letter or other arrangement that you have entered into with the Company and the terms set forth in this Award Certificate, the latter shall control. In the event of any conflict between the terms set forth in this Award Certificate and the terms of the Plan, the latter shall control.
|
18.
|
Consents under local law
.
|
19.
|
Award modification
.
|
20.
|
Severability
.
|
22.
|
Governing law
.
|
23.
|
Section 409A.
|
24.
|
Defined terms
.
|
(1)
|
any act or omission which constitutes a material breach of your obligations to the Company or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to Disability) within ten (10) business days after written notification thereof to you by the Company;
|
(2)
|
any act or omission by you that constitutes (x) fraud or intentional misrepresentation, (y) embezzlement, misappropriation or conversion of assets of, or business opportunities considered by, the Company or (z) any other act which has caused or may reasonably be expected to cause material injury to the interest or business reputation of the Company; or
|
(3)
|
your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Company is a member or of any policy of the Company relating to compliance with any of the foregoing.
|
(c)
|
A
“Change in Control”
means, except as provided otherwise below, the first to occur of any of the following events:
|
(1)
|
except as otherwise provided in clause (3) below, any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”), as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (i) any employee plan established by the Company or any of its Subsidiaries, (ii) any group of employees holding shares subject to agreements relating to the voting of such shares, (iii) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company, either (x) acquires ownership of stock of the Company that, together with stock held by such person (not including the stock owned by such person any stock acquired directly from the Company other than in connection with the acquisition by the Company of a business), constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company (but only if such person did not own more than 50% of the total fair market value of the stock of the Company prior to the acquisition of additional stock), or (y) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person) ownership of the stock of the Company possessing thirty percent (30%) or more of the total voting power
|
(2)
|
a change in the composition of the Board during any twelve-month period, such that individuals who, as of the Date of the Award, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board;
provided, however,
that any individual becoming a member of the Board subsequent to the date of Date of the Award whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board;
|
(3)
|
the consummation of a merger or consolidation of the Company with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (i) a merger or consolidation which results in the securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (determined pursuant to clause (1) above) is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional securities);
|
(4)
|
the complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company's stock, (ii) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, either by the Company or by a person or more than one person acting as a group, that owns fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company; provided, however, that a Change in Control pursuant to this clause (4) shall not be deemed
|
(d)
|
“Committee”
means the Compensation Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.
|
(e)
|
“
Company
”
means Discover and all of its Subsidiaries.
|
(f)
|
“Competitive Activity”
means:
|
(g)
|
“Competitor”
means any corporation, partnership or other entity that engages in (or that owns a significant interest in any corporation, partnership or other entity that engages in) (i) the business of consumer lending, including, without limitation, credit card issuance or electronic payment services, or (ii) any other business in which you have been involved in or had significant knowledge of, which has been conducted by the Company at any time during your employment with the Company. For the avoidance of doubt, a competitor of any entity which results from a corporate transaction involving the Company that constitutes a Change in Control shall be considered a Competitor for purposes of this Award Certificate.
|
(h)
|
“
Date of the Award
”
means December 9, 2011.
|
(i)
|
“
Disability
”
means a “permanent and total disability,” as defined in Section 22(e)(3) of
|
(j)
|
“Discover”
means Discover Financial Services, a Delaware corporation.
|
(k)
|
“Discover EPS”
means sum of EPS for each fiscal year within the Performance Period.
|
(l)
|
“Employed”
and
“Employment”
refer to employment with the Company and/or Related Employment.
|
(m)
|
“
EPS
” shall mean, Net Income divided by the weighted average number of Discover shares of common stock (fully diluted)
|
(n)
|
“EPS Minimum”
means the EPS minimum target for the Performance Period set forth in the Company's business plan.
|
(o)
|
“EPS Target”
means the EPS target for the Performance Period set forth in the Company's business plan.
|
(p)
|
“EPS Maximum”
means the EPS maximum target for the Performance Period set forth in the Company's business plan.
|
(q)
|
“Good Reason”
means the occurrence of any of the following upon, or within six (6) months prior to or twenty-four (24) months after the occurrence of a Change in Control of Discover without your prior written consent:
|
(1)
|
(A) any material diminution in your assigned duties, responsibilities and/or authority, including the assignment to you of any duties, responsibilities or authority inconsistent with the duties, responsibilities and authority assigned to you, immediately prior to such assignment, or (B) a material diminution in the authority, duties, or responsibilities of the supervisor to whom you are required to report;
|
(2)
|
any material reduction in your base compensation;
provided, however
, that Company-initiated across-the-board reductions in compensation affecting substantially all eligible Company employees shall alone not be considered “Good Reason,” unless the compensation reductions exceed twenty percent (20%) of your base compensation;
|
(3)
|
A material diminution of the budget over which you have authority;
|
(4)
|
The Company's requiring you to be based at a location that (A) is in excess of thirty-five (35) miles from the location of your principal job location or office immediately prior to the Change in Control, or (B) results in an increase in your normal daily commuting time by more than ninety (90) minutes, except for required travel on Company's business to an extent substantially consistent with your then present business travel obligations; or
|
(5)
|
Any other action or inaction that constitutes a material breach by the Company of any agreement pursuant to which you provide services to the Company.
|
(r)
|
“
Internal Revenue Code
”
means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.
|
(s)
|
“Legal Requirement”
means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.
|
(t)
|
“
Net Income
” means the Company's net income excluding unusual, one-time events, not reflected in business plan assumptions, as determined by the Compensation Committee, in its sole discretion.
|
(u)
|
“Performance Period”
means the two-year period commencing on December 1, 2011 and ending on November 30, 2013.
|
(v)
|
“
Plan
”
means the Discover Financial Services Amended and Restated 2007 Omnibus Incentive Plan, as in effect from time to time.
|
(w)
|
“Pro Ration Fraction”
means a fraction, the numerator of which is the number of days starting with and inclusive of the first day of the Performance Period and ending on the effective date of your termination of Employment and the denominator of which is the number of days in the Performance Period.
|
(x)
|
“
Related Employment
”
means your employment with an employer other than the Company (such employer, herein referred to as a “
Related Employer
”),
provided
: (i) you undertake such employment at the written request or with the written consent of Discover's Head of Human Resources; (ii) immediately prior to undertaking such employment you were an employee of the Company or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Company in its discretion as Related Employment; and,
provided
further
that the Company may (1) determine at any time in its sole discretion that employment that was recognized by the Company as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Company may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Company, or otherwise modify your and the Company's respective rights and obligations.
|
(y)
|
“
Retirement
” means the termination of your Employment by you or by the Company for any reason other than for Cause and other than due to your death or Disability, on or after the date on which:
|
(1)
|
you have attained age 55 and completed at least 5 years of service with the Company; or
|
(2)
|
you have attained age 65, whichever occurs first.
|
(z)
|
“
Scheduled Vesting Date
” means January 2, 2015.
|
(aa)
|
“Subsidiary”
means (i) a corporation or other entity with respect to which Discover, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation's board of directors or analogous governing body, or (ii) any other corporation or other entity in which Discover, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.
|
(ab)
|
“
Target Award
” means the number of PSUs that has been communicated to you separately and that will be earned, subject to the other terms and conditions of this Award Certificate, if the Discover EPS Target is achieved.
|
(ac)
|
“Wrongful Solicitation”
occurs upon either of the following events:
|
Beneficiary(ies) Name
|
Relationship
|
Percentage
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ DAVID W. NELMS
|
|
David W. Nelms
Chairman and Chief Executive Officer
|
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ R. MARK GRAF
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R. Mark Graf
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Executive Vice President, Chief Financial Officer and Chief Accounting Officer
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1.
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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2.
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ DAVID W. NELMS
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David W. Nelms
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Chairman and Chief Executive Officer
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/s/ R. MARK GRAF
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R. Mark Graf
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Executive Vice President, Chief Financial Officer and Chief Accounting Officer
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